Adjustable Mortgages Gain Favor

NEW YORK -- Adjustable-rate mortgages, deeply out of favor with consumers for the past year, are staging a comeback.

The loans, which typically carry lower initial rates than fixed mortgages, are catching the eye of first-time homebuyers as the springtime market gets under way, lenders and analysts say.

The trend has been reinforced by a steady rise in fixed rates since mid- January.

Gary Gordon, a thrift analyst at PaineWebber, estimates that adjustables will account for 30 to 40 percent of all new mortgages by late summer, up from the 15 percent reported for February by the Federal Housing Finance Board.

The February reading was the lowest since the government began tracking adjustables in 1984.

Rising demand for adjustables is good news for big thrifts like H.F. Ahmanson and Co., Golden West Financial Corp. and Great Western Financial Corp.

These California giants specialize in making and holding adjustables.

At Great Western, the nation`s second-largest thrift company, demand for the loans is surging. Adjustables make up about 80 percent of Great Western`s pipeline of applications not yet closed, up from 20 percent in January, company officials said.

Mortgage banking companies are participating in the boom. While historically they have lagged behind thrifts in adjustable-loan origination, mortgage banks now have a more developed secondary market for the loans that is stimulating their origination, said Peter Treadway, a thrift analyst at Smith Barney, Harris Upham and Co.

Indeed, rates on fixed mortgages have become increasingly less appealing. The average rate on new fixed mortgages has risen 77 basis points since mid- January, to 9.08 percent, according to HSH Associates, a Butler, N.J., rate-tracking firm. The rise was prompted by jumps in long-term bond yields.

While initial rates on adjustables also have moved up, they remain far below those of fixed loans. The national average for one-year adjustables is 6.24 percent, HSH said, or 284 basis points below fixed rates. That spread has widened 46 basis points since the beginning of the year.